Chapter 4 Theory of Consumer Behaviour
Section A – Multiple Choice Questions
Answer all the questions below. Choose one correct answer.
1. Which of the following statements is possible?
A Total utility decreases when marginal utility is zero
B Total utility increases when marginal utility is positive
C Total utility decreases when marginal utility is positive
D Total utility increases when marginal utility is negative
2. The law of diminishing marginal utility implies that as a person consumes more and
more of a given good, the _______________
A marginal utility becomes negative
B total utility will fall and then rise
C marginal utility will decline
D total utility will decline
3. For the normal good, a decrease in price via income effect will _____________ quantity
demanded, while a decrease in price via substitution effect will ____________________
quantity demanded and the net effect of a price decrease will _____________________
quantity demanded.
A decrease, increase, decrease
B decrease, increase, increase
C increase, decrease, increase
D increase, increase, increase
4. When the marginal utility derived from consuming the 4th avocado is -2, the total utility
must be
A increasing
B decreasing
C maximized
D negative as well
5. The price of X is RM5 and the price of Y is RM4. Which of the following (X,Y) bundles is
affordable, if your income is RM25?
A (0, 7)
B (3, 3)
C (3, 2)
D (2, 4)
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6. Suppose an individual’s marginal rate of substitution is 2. Suppose also that
PX = 1; PY = 0.25. This person should _____________ in order to increase utility.
A buy more X and fewer Y, if possible
B buy more Y and fewer X, if possible
C resume the current consumption
D buy fewer of both X and Y
7. Assuming that an individual’s preferences is expressed as (X,Y) = XY, and PX = 5 and
PY = 10. Which of the following (X, Y) bundles will this person purchase, if his/her
income is RM30?
A (4, 1)
B (1, 4)
C (3, 2)
D (1, 3)
8 When a 4th glass of milk does not generate as much satisfaction as the 3rd glass, this
exemplifies ________________ .
A consumer equilibrium
B diminishing total utility
C diminishing marginal utility
D marginal rate of substitution
9. If X is a normal good and its price rises, the substitution effect ___________________ .
A is negative, but the income effect is positive
B is positive, but the income effect is negative
C and the income effect are both positive
D and the income effect are both negative
10. There is an income effect when the price of one good changes because
________________ .
A the price change represents a change in real income
B there is diminishing marginal rate of substitution
C there is completeness or preferences
D one of the good must inferior
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Section B : Structured Questions
Answer all the questions below.
1. The following table shows Thomas’s utility from consuming two different food – salad
and sausage roll. The price of a bowl of salad is RM5 and the price of a sausage roll is
RM2.
Salad Sausage roll
Quantity Total Marginal Total Marginal
(units) Margina Marginal
utility utility utility utility
l utility utility
(per RM) (per RM)
1 5 20
2 10 10
3 9 6
4 6 5
5 5 4
6 3.33 1
(a) Fill up the above table
(b) List down the possible combination of both goods
(c) If Thomas has RM10 to spend on salads and sausage rolls, how many units of
each good should he purchase
(d) Thomas’s pocket money has now increase fromRM10 to RM18. If he spend only
on these two goods, what is the optimal consumption bundle?
2. Azura consumes Good J and Good K. Her consumption yields the following total utility,
as shown in the given table. Azura has RM52 to spend. Suppose that the prices of
goods J and K are RM8 and RM4, respectively.
Total utility
Quantity (units)
Good J Good K
1 56 32
2 104 60
3 156 94
4 160 104
5 170 116
6 176 126
7 178 134
(a) Calculate the marginal utility for each good
(b) How many units of good J and K should Azura buy to maximize her utility with
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the income of RM52?
(c) What is the total utility received by Azura at equilibrium?
(d) If Azura’s income decreased to RM28, what quantities of goods J and K should
she purchase to maximize her utility?
(e) What is Azura’s new total utility at equilibrium?
3. Annie consumes good A and Good B. She has only RM22 to spend on these goods.
Suppose that the price of goods A and B are both RM2.
Margina
Marginal
Quantity Total Margina l utility Quantity Total Margina
utility
of Good A utility l utility (per of Good A utility l utility
(per RM)
RM)
1 10 5 1 16
2 9 2 30
3 4 3 6
4 34 4 62 16
5 6 3 5 8
6 2.5 6 5
7 49 7 4
(a) Complete the above table
(b) What is Anne’s marginal utility per RM spent on the 4th unit good A?
(c) How many units of goods A and B should Annie buy to maximize her utility?
(d) Suppose that the consumer’s income increased from RM22 to RM28, what
would the new utility-maximizing combination of goods A and B be?
Section C : Essay Questions
Answer all the questions below.
1. Using a graph, the income effect and the substitution effect explain what will happen to
the quantity demanded for a Giften good when the price falls
2. Explain the four characteristics of an indifference curve
3. Define utility and explain the relationship between total utility and marginal utility
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5. Using the indifference curve and the budget line, explain how a consumer can achieve
the equilibrium level
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